BEHAVIORAL

ASPECTS OF
PROFIT PLANNING
AND BUDGETING
1&2
Group 2
GROUP MEMBERS:
1.Ra d i n d a L a r a s a t i k
(C1C022015)
2.A l y a Ra m a d a n i
(C1C022043)
3.A h m a d D a n d a A
(C1C022091)
4.Pa t t r i s y a
(C1C022121)
 THE MULTIPLE FUNCTIONS OF PROFIT
PLANNING AND BUDGETING

Budgets are managerial plans for action expressed in financial terms.

They are short-term comprehensive profit plans that put management's
objectives. and goals into operation. They are managerial tools that
insure the attainment of organizational goals and provide the dollar-and-
cent guidelines for day-to- day operations.

1 The final result of a firm's planning process.

The firm's blueprint for action, reflecting management's priorities in the

2
allocation of organizational resources
 As a internal communication device that links the various organizational
3 departments or divisions with each other and with top management

4 As standards against which actual operating results may be compared

5 As control devices that allow management to pinpoint

Attempt to influence and motivate managers and employees to continue to

6 act in ways to consistent in effective and efficient operations and in
congruence with organizational actions.
 A BEHAVIORAL OVERVIEW OF THE
BUDGET MAKING PROCESS

Top management has to decide what the firms

short range objective are and what strategies
will be used to attain them
Goals have to be set and resources allocated

A comprehensive budget or profit plan has to

be prepared, then approved by top
management
Human interaction is required at each step of budget process,
thus, the behavioral aspect of budgeting should be fully
understood in order to avoid the human related dysfunctional
side effect of budgeting
Goal’s Setting Stage Implementation Stage

THREE MAJOR STAGES IN

BUDGET MAKING PROCESS

Control and Performanc

e Evaluation Stage
 GOAL’S SETTING STAGE

The planning activity begins with the translation of broad organizational

objective into specific activity goals. To develop realistic plans and create
workable budget, extensive interaction is required between the organization’s
line and staff manager

Participation

IMPACT Congruence

Commitment
 IMPLEMENTATION STAGE

The formal plan is used to communicate organizational objectives and

strategies and to positively motivate people in organization

Communicatio
n

IMPACT Cooperation

Coordination
 CONTROL AND PERFORMANCE
EVALUATION STAGE
After the budget has been impemented, it function as a key element in the
control system. it becomes yardstick against which actual performance is
compared and it serve as the basis for management by exception

Pressure

Motivation
I M PA C T
Aspiration

Anxiety
DYSFUNCTIONAL CONSEQUENCES OF THE
BUDGET-MAKING PROCESS
DISTRUST

• Budgets tend to oversimplify or distort the "real" situation and fail to

allow for variations in external factors.
• Budgets do not adequately reflect qualitative variables such as the know-
how of the labor force, quality of materials, and efficiency of machinery.
• Budgets simply confirm what supervisors already know.
• Budgets are frequently used to manipulate supervisors so the indicated
performance measures are suspect.
• Budget reports emphasize results, not reasons.
• Budgets interfere with supervisors' leadership styles.
• Budgets tend to emphasize failure.
 DYSFUNCTIONAL CONSEQUENCES OF THE
BUDEGT-MAKING PROCESS

RESISTANCE INTERNAL CONFLICT

• Many people become

• Internal conflict may develop as a
accustomed to particular ways of
result of these interactions, or as a
viewing events and are simply
result of performance reports that
not interested in changing
compare one department to another

• Budget process requires a great

deal of time and attention
• Many excuses for this resistance
RELEVANT BEHAVIORAL SCIENCE CONCEPTS
IN THE PLANNING ENVIRONMENT

• The impact of the planning Environment

The planning environment refers to the

structure, process, and interaction patrerns in
the work setting.

So, in one environment, a specific action by

top management may induce favorable
behavior and budget results, while the same
action in a different environment may induce
undesirable behavior and dysfunctional budget
results.
 RELEVANT BEHAVIORAL SCIENCE CONCEPTS
IN THE PLANNING ENVIRONMENT
• Organizational Size and Structure

The size and structure of an organization influences

human behavior and interaction patterns in the goal-
setting, implementation, and control and evaluation
stages of the planning process.

The size of the organization affects the organizational

structure, in small companies, the planning and control
structure is relatively simple because organizational
activities are only carried out by a few people. In contrast,
large companies must develop a complex structure of
bureaucracy to handle the administration of the various
functions of the organization.
RELEVANT BEHAVIORAL SCIENCE CONCEPTS
IN THE PLANNING ENVIRONMENT
• Leadership Styles

McGregor's Theory X In contrast,

describes a tightly McGregor's Theory Y
controlled, authoritarian and Likert's
leadership style in which democratic leadership
need for efficiency and style encourage
control dictates the employee involvement
managerial approach for and participation in
dealing with goal setting and
subordinates. decision making.
 RELEVANT BEHAVIORAL SCIENCE CONCEPTS
IN THE PLANNING ENVIRONMENT

• Stability of Organizational
Environments

Stability of organizational environments this

includes the existing political and economic
climate, availabil ity of supplies, structure of
the industries that service the organization,
the nature of competition, and so on.

Stable environments pose limited risks and

allow the goal-setting process to be
democratic and participative. Whereas a
rapidly changing environments result in high-
RELEVANT BEHAVIORAL SCIENCE CONCEPTS IN
THE BUDGETING PROCESS

The Goal-Setting Stage

1. Goal Congruence
A major problem encountered in the goal-setting
stage is achieving a workable degree of goal
congruence or compatability among the goals of the
organization, its subunits (divisions and/or
departments), and its participating members. Goal
congruence or compatability occurs when individuals
perceive that their personal needs can be best
satisfied by achieving the organizational goals.
RELEVANT BEHAVIORAL SCIENCE CONCEPTS IN
THE BUDGETING PROCESS

2. Participation
Participation in the budget-making process is
acclaimed by many as a panacea for meeting the
budget-inaking prtualization needs of organizational
members. Participation is a "process of joint decision
making by two of more parties in which the decisions
have future effects on those making them."
 RELEVANT BEHAVIORAL SCIENCE CONCEPTS IN
THE BUDGETING PROCESS

3. Benefits from Participation

One benefit of successful participation is
that participants become ego involved and
not just task-involved in their work. It
enhances morale and induces greater
initiative at all management levels.
Meaningful participation also increases the
sense of group cohesiveness, which in turn
tends to increase Cooperation among group
members in goal setting.
 RELEVANT BEHAVIORAL SCIENCE CONCEPTS IN
THE BUDGETING PROCESS

4. Limitations and Problems of Participation

Even under the most ideal conditions, participation in
goal setting has its limitations. The process of
participation gives managers power to establish the
content of their budget. This power may be used manner
that has dysfunctional consequences for the
organization.
 THE IMPLEMENTATION STAGE

• After the organizational goals have been

set, the planning director consolidates
them into the comprehensive formal
budget.
• To make a budget work, ail employees
must learn to see it as a positive vehicle
for organizational action and as an
improvement rather than a burden or
management weapon.
 COMMUNICATING THE BUDGET

The controller or director of planning is resp.onsible for

implementing the budget. This is accomplished by
communicating the approved operational goals to people at
lower organizational levels.
The subgoals can be communicated most effectively if they are
personally explained and supplemented with written guidelines or
informal follow-up discussions with subunit leaders

That is, the planning director should explain the basics of

the budget-making process and the assumptions that
resulted in the final budget amounts.
 DIAGNOSTIC EVALUATION OF THE BUSINESS
DILEMMA
The Ramus Corporation case illustrates the problems in the planning and
budgeting system after declining profits since 1980. Paul Cooper was
appointed director of profit planning in June 1983 to revamp the budget
system, which began with annual budgets and continued with three-year
plans. Previously, controller Roberta Powell had implemented a poorly
structured participatory budgeting system in 1982, which resulted in
unrealistic budgets and interdepartmental conflict. Cooper faced a dilemma
between using a participatory approach, which could increase motivation
but risked problems, or an authoritarian approach, which could lead to
resistance from managers. Lack of support from president Anthony Ramus,
who focused on technical aspects and was reluctant to get involved in
budget details, added to the challenge. In September 1983, Cooper asked
department managers to prepare their own budgets in the hope of
increasing profits.
 DIAGNOSTIC EVALUATION OF THE BUSINESS
DILEMMA
Ramus Corporation faces challenges in implementing a formal budget
system due to lack of support from top management, high levels of
decentralization, and the absence of a formal evaluation system in the
past. Paul Cooper, as the new planning director, must deal with department
managers who are skeptical of budgets. To improve this situation, Cooper
needs to gain active support from the president and controller, involve
department managers in the planning process, and educate them about
the benefits of budgeting. In addition, Cooper must ensure that variances
in performance reports are investigated and corrective actions taken, and
revise the budget system based on these findings. It is important to have
realistic expectations that significant results from the budget system may
take several years.
 CONCLUSION
Who should provide decision inputs during the planning stage,
approve the plans, implement the budget, evaluate the
variances, and be responsible for correcting inefficiencies. The
answer depends on the many variables that impact the
budget-making process. The organizational structure,
organizational culture, leadership styles, degree of employee
participation in decision making, amount of slack to be allowed
and the degree of pressure the budget is to induce are some
factors that will affect the answer.
THANK YOU!